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LOLC boss comments on a ‘real’ indicator
Rubber cheques signal small & medium sector downturn

A sharp increase in the number of dishonoured cheques was a strong indicator that the small and medium business sector is undergoing difficulties, one of the country’s most senior businessmen has said.

Mr. C.P. de Silva, the Chairman of the Lanka Orix Leasing Company Limited (LOLC) has said in the company’s just published annual report that the leasing industry has always been a barometer reflecting the performance of the small and medium sector.

"This sector has shown stagnation during the period under review, and judging by the increase in dishonoured cheques (which must be reflected in Central Bank statistics) has been undergoing difficulties,’’ he said noting that all financial institutions have experienced increased problems of collections from credit customers.

De Silva who said that LOLC is no exception to this trend had seen its post tax profits drop 15.3% during the year under review despite a 13.3% increase in turnover.

Turnover grew to Rs.2.4 billion from Rs.2.1 billion the previous year while the after-tax profit of Rs.144 million was down from Rs.170 million a year earlier.

A saving grace for the company had been a 17.4% growth in its assets which has increased to Rs.1.33 billion.

De Silva said that the company’s headquarters building purchased in 1991 for about Rs.60 million had been steadily depreciated annually to about Rs.51 million. Three years ago, one of the country’s foremost valuers had revalued the building at Rs.162 million. But on his advice, they had reduced this figure by 20% and shown a value of Rs.129 million in their balance sheet creating a capital (revaluation reserve) of Rs.79 million.

LOLC’s four branches in Kandy, Matara, Badulla and Ratnapura have met their budgets during the period under review. The Ratnapura branch had been making profits from February this year - just 9 months after opening.

De Silva who said that the progress of the branches indicated that there is a further opportunity for the developing of leasing in the provinces and said that they were thinking of opening two branches in the current financial year in areas with significant potential for economic growth.

He said that their two main concerns were reducing the cost of funds and controlling overdues. Both these objectives are being vigorously addressed.

They have begun increasingly resorting to the market rather than depending entirely on bank borrowings as a means of reducing their cost of funds. By the end of the financial year under review, LOLC had issued over Rs.1 billion in commercial paper making the company one of the major players in that area. They have also started raising money on promissory notes.

Dealing with increased overdues, de Silva said that this was mainly due to the difficulties that the small and medium sector is undergoing. The problem is being systematically addressed by close and coordinated cooperation between LOLC’s marketing, recoveries and legal departments.

"We believe that in the area of controlling overdues, we continue to be superior to the competition,’’ he said.

LOLC which had intended making a private placement of its shares and got shareholder permission for this in 1997 had not pursued this matter in the context of the decline in the stock market. Their share too had declined in line with the market. De Silva said that if it became necessary, the company would apply for shareholder permission once again to proceed with the private placement.

LOLC which paid a 10% interim dividend last March is now paying a final dividend of 15% to give shareholders a 25% return for the year which is the same as that paid in the previous year.

Its main subsidiary, Lanka Orix Factors Limited (LOFAC) which had factored Rs.2.8 billion worth of invoices recording a 48% growth in business volume, had seen its net profit before tax decline to Rs.4.7 million. This was attributed to reduced margins and write-offs.

De Silva reported that their associate company, Pruduentia Investment Corporation Limited, had concentrated for the last few years on its real estate project, ``Sunset Reef’’ of Leisure Homes Limited. This company has built 35 luxury villas at Uswetakeiyawa and the project is close to completion.

The year under review saw Asia Capital increase its stake in LOLC to 23.56% and has now become the second largest shareholder in the company behind Japan’s Orix Corporation which owns 30%. Asia Capital’s Chairman, Mr. Nigel Austin, has taken a seat on the LOLC board.

The directors of the company are: Messrs. C. P. de Silva (Chairman), L. S. Jayawardena (Deputy Chairman), Y. Miyauchi, T. Koizumi, M. T. L. Fernando, N. Ratnasabapathy, S. S. Jayawickrama, N. D. C. Austin and E. C. S. R. Muttupulle.

Directors will keep their holdings
Forty rupee value placed on CTC Eagle share

Ernst & Young, the well known firm of chartered accountants have valued the CTC Eagle share for which an offer of Rs.44.25 has been made by Zurich NDB Finance Lanka (Pvt) Limited (ZNFL) at Rs.40 per share.

However, the accountants have stressed that they have conducted the valuation in a short time frame which limited their ability to carry out analyses and investigations necessary for a comprehensive valuation of a firm like CTC Eagle.

"Therefore the above (Rs.40) value recommendation should be interpreted in that context,’’ Ernst & Young have said.

The directors of CTC Eagle have circularised the Ernst & Young opinion to shareholders of the company in terms of the Takeovers and Mergers Code which requires them to obtain "competent and independent advice’’ on any offer of this nature and make it known to shareholders.

Currently ZNFL owns 80.36% of CTC Eagle while the other two major shareholders are James Finlays (5%) and Asia Capital (2.23%). The remaining 12.41% of the shares is dispersed among 2,330 shareholders as at May 24, 1999.

CTC Eagle has also said that its present directors who owns shares and those directors who act as trustees of the Employees Benefit Fund which has a stake in the company have indicated to the board that they do not intend to dispose of their shares in response to the offer.

They have also said that the company will remain quoted on the Colombo Stock Exchange.

They have said that the returns to shareholders of CTC Eagle had progressively increased over the past 10 years, and pointed out that shareholders have received 4 bonus share issues since the company’s shares were first offered to the public in 1988 at the ten rupee par value.

Pointing out that over a period of 10 years the CTC Eagle price had increased to its present level of Rs.44.25 (the offer price), the directors of CTC Eagle said: "It is to be reasonably expected, that other factors being constant, the acquisition of the controlling interest by the offeror and its association with the Zurich Financial Services Group can only prove to be of value to the offeree company (CTC Eagle) and consequently to its shareholders’’.

According to Ernst & Young, CTC Eagle had a market share of approximately 20% of the country’s life insurance business and 7% of its general insurance business in 1977. Among the insurance companies, it ranked below Ceylinco Insurance and above Union Assurance and Janashakthi Insurance in terms of market share.

CTC Eagle had a profit of Rs.118.1 million attributable to shareholders in 1998 and Rs.100.3 million in 1997.

Analysts said that given the dominant shareholding of three investors who hold over 87% of the company and the fact that some of the balance 12.4% too will be acquired by ZNFL following the present offer, the liquidity of the CTC Eagle share on the Colombo Stock Exchange will be very limited.

They also said that the new owners may not necessarily follow the policy of maximising dividends as during the period when the Ceylon Tobacco Company controls CTC Eagle.

Provisions drive Asia Capital deep into the red

Asset rich Asia Capital Ltd. has seen a Rs. 30 million operating loss and Rs. 90.1 million provision for diminution of the value of investments swallow-up its substantial profit share from associate companies leaving its bottom line for the year ended March 31, 1999, very much in the red according to provisional figures submitted to shareholders.

Asia Capital owns substantial interests in blue chips like Richard Pieris and LOLC from which it had received a Rs. 77 million profit share during the year under review.

The company’s turnover too was sharply down to Rs. 172.7 million during the year from Rs. 663.6 million a year earlier. The operating loss of Rs. 30 million compared with a profit of Rs. 173.9 million the previous year.

Interest charges of Rs. 20.6 million (Rs. 0.2 million the previous year) and a sharp reduction in other income down to Rs. 27.1 million from Rs. 68.3 million the previous year added to the red ink.

The loss for the year of Rs. 38.5 million compared with a Rs. 227.1 million profit a year earlier.

With brought forward losses of Rs. 297.2 million, Asia capital was carrying forward a Rs. 335.8 million loss as at March 321, 1999.

Asia Capital which has an issued capital of Rs. 1.1 billion has investments worth Rs. 1.2 billion and net current liabilities of Rs. 32.5 million. Its capital reserve was Rs. 465.5 million as at balance sheet date.

July 1 launch for NTB

The Nations Trust Bank (NTB), successor to the Overseas Trust Bank (OTB) will be formally inaugurating on July 1 at the bank’s headquarters on York Street, Colombo 1, the promoters said.

NTB, in which the JKH and Central Finance groups have controlling interest, acquired the Colombo business of the OTB earlier this year and set up the NTB to continue this operation.

A very successful public share issue was thereafter made with the NTB share priced at Rs.12 for the initial public offer prior to listing on the Colombo Stock Exchange. Although the issue was over-subscribed several times over, the NTB share price has gradually declined to the Rs. 12 issue price level at the Colombo Stock Exchange last week.

Higher volumes help John Keells to maintain tea broking earnings
Bought leaf factories unable to settle smallholders
- Ken Balendra

Bought leaf factories processing smallholder produce have been losing money in recent months and many have been unable to settle arrears due to suppliers, John Keells Chairman Ken Balendra has said in the just published annual report of John Keells Ltd.

Balendra who said that the viability of many tea estates are strained at present due to low prices attributed part of the problems of bought leaf factories to the regulatory formula for green leaf purchases in his chairman’s statement dated May 27.

This formula has now been revised. But Balendra has also said that at the time of his writing the review, bought leaf factory owners have been awaiting a government relief package to continue in business.

Despite disappointing prices, Balendra said that the company, which is the biggest tea broker in the country, had been able to almost achieve the previous year’s income from its core tea broking business on account of larger volumes handled.

He said that the financial year opened with tea prices at an attractive level but these had plunged sharply by the end of the year.

While fears of a crop shortfall due to weather considerations had earlier boosted prices, the subsequent depression was attributable to the Russian crisis on one hand and a 140 million kg. global tea crop surplus on the other.

He said that the tea industry still had many positive features with a record harvest achieved once again. Sri Lanka remained the world’s top black tea exporter and Colombo was the largest auction centre. Tea remained one of Sri Lanka’s leading net foreign exchange earners.

While John Keells had done well on tea, its rubber broking business had been unprofitable due to the continuing decline of rubber prices that were down to extremely low levels. Balendra said that rubber estates were incurring heavy losses and broking of rubber too was unprofitable.

He said that their warehousing department offered good quality space to clients. Increases in charges for these services following cost escalation had been "an absolute necessity.’’

John Keells Limited who owns the Glennie Street premises in which the group’s corporate headquarters are located and other valuable real estate had invested in partly refurbishing these premises during the previous financial year. The refurbishing of the second floor during the year under review has completed the refurbishment of the entire complex.

The decline in the share market had resulted in John Keells Stock Brokers (Pvt) Limited, a subsidiary of John Keells losing during the year under review.

Balendra said that foreign institutional interest in the Sri Lanka market had remained weak during the year resulting in an outflow of Rs.1.9 billion.

"A narrow scope of activity and poor market liquidity have limited the earnings of all stock broking firms,’’ he said.

He said that increased tourist arrivals in the country had helped their associate company, International Tourists and Hoteliers Limited, which owns Hotel Bayroo in Beruwala, to record another profitable year. The other associate company , Keells Realtors Limited, with properties in Navam Mawatha and Mattakkuliya also had a profitable year.

Balendra said that the consolidated profit before-tax of Rs.83 million was below the previous year’s earning of Rs.114 million mainly on account of John Keells Stock Brokers having to incur losses during the year.

The directors of the company have recommended a final dividend of 30% on top of two interims totaling 40% paid earlier. The company made a 1 for 1 bonus issue in 1998.

The directors of the company are: Messrs. K. Balendra (Chairman), V. Lintotawela, C. J. Fernando, J. S. Ratwatte, L. D. Ramanayake (Managing Director), S. N. Dharmaratna, S. A. Jayewickreme, S. C. Munasinghe, V. A. . Perera, M. F. S. P. Senadhira, Ms. A. Coomaraswamy and Ms. D. C. Alagaratnam.

Japan’s slow economic recovery
By Kanes

The Japanese Prime Minister Keizo Obuchi has expressed the view that the Japanese economy is bottoming out and in fact the negative growth of 2.8 per cent in 1998 will be followed by a positive growth of 0.5 per cent in 1999. His optimism is based on the expansionary programme launched by the government to revive the economy - a programme which embraces public works investments, tax breaks and other incentives for house buyers, bail-out and restructuring of banks, cheap credit to big firms in difficulties and cheaper loans to small businesses. As seven recovery programmes have met with little success, the eighth recovery programme of Premier Obuchi is the largest of them all. It envisages 40 trillion yen or $348 billion in stimulus spending and tax cuts. Stimulus spending involves investment of $69 billion in computerized highways and other infrastructure and new loans amounting to $ 49 billion for faltering enterprises. The government-owned Japan Development Bank, for instance, has provided cheap credit facilities to car makers, steel companies and supermarket chains: the troubled car firm Nissan was granted 85 billion yen at low (subsidized) interest; the bank is planning now to buy bonds issued by weaker private companies. Tax cuts of about $50 billion have taken effect from April while spending vouchers worth $175 each have been issued to the elderly and households with children. A further package of extra public spending to create 700,000 jobs in the private and public sectors was announced in early June.

The bad debts of Japanese banks amount to 76 to 100 trillion yen or $623 to $820 billion and the 17 biggest Japanese banks will make losses in 1999. The government has injected 7.45 trillion yen or $62 billion to the biggest banks and requested them to clear their bad debts by the end of this year. The government capital injection is equal to about half of the bank’s equity and the capital adequacy ratio has risen to more than 11 per cent. Nine of the biggest banks have sold $25 billion of bad loans in the 12 months March 1998 to March 1999. The banks have also put aside provisions for about half of their bad debts and pledged to cut costs; they are now in a better position to expand their lending. The government has indicated that there will be an additional injection of capital to banks and a reduction of short-term interest rates to near zero in the course of the year.

Under an emergency government plan initiated in October 1998, 52 regional credit guarantee corporations (owned jointly by central and local governments) are required to provide 20 trillion yen or $167 billion of loan guarantees to small and medium sized companies by March 2000. The small business sector accounts for more than 50 per cent of the country’s manufacturing output and nearly 80 per cent of the manufacturing workforce: about 1600 of them went bust each month in 1998 but the number has fallen this year. The guarantees are meant to help sound companies to secure loans from Japan’s banks which as shown earlier, have got into trouble and restricted their lending. They have been used by a large number of small companies and they are expected to exceed 20 trillion yen soon and would need to be replenished. Some fear that the credit guarantees will help to preserve good as well as bad business units and expect defaults to exceed 10 per cent of the amount guaranteed.

Restructuring of Business
Many Japanese companies in a number of sectors such as banking, telecommunications and pharmaceuticals, are too small and too dependent on the domestic market; acquisitions and mergers therefore are expected to strengthen these companies. The government is also removing legal and regulatory barriers to mergers. Japan’s network of cross-share holdings which offer companies the protection of friendly suppliers and banker-owners, can slow down mergers and acquisitions, particularly as more than 40 per cent of company shares are owned by other companies; loosening these ties may take some time.

Generally Japanese businessmen are reluctant to sell their enterprises wholly or partly to foreigners, but the long recession which has brought even big business houses to bankruptcy, leaves no choice but to forge foreign partnerships; they would prefer to join hands with other domestic Japanese business houses but they too are in a bad way. Thus a few leading Japanese business firms have invited or accepted foreign partners, though not with much enthusiasm; Sumitomo Tyres have joined with Goodyear Tyres (USA), Teijin (polyester film makers) have brought Dupont (USA) as partners, Nissan has sold 36.8 per cent of their shares to Renault (France) and Japan Energy has formed a joint venture with Showa Shell.

The recession is also undermining the traditional Japanese system of lifetime employment. There is something like a social contract since the nineteenth century that binds workers and companies together for life; company managers regarded firing workers as a thing worse than committing a crime; thus, many Japanese companies kept thousands of workers who were actually surplus to their needs, on their payroll, in order to honour the social contract. The business downturn over several years has, however, forced the Japanese business houses to adopt the American practice of firing workers when firms suffer losses. Sony announced in March 1999 plans to retrench 17,000; NEC wants to cut jobs by 15,000; Mitsubishi Electric will eliminate 8400 jobs in Japan and 6100 overseas by March 2002 and 15 of Japan’s biggest banks will close 13 per cent of their branches and cut 20,000 jobs. Other companies are planning to do the same. The number of people out of work because of restructuring or bankruptcies rose to one million in January 1999.

Optimism on the Japanese recovery this year is also based on the economic growth of 1.9 per cent in the first quarter of 1999, in stock prices and a stable yen. Stock prices in mid-May 1999 were 12.8 per cent higher than six months ago and 4.9 per cent higher than 12 months ago. The yen on the other hand has remained around 120 yen to the US dollar for some months and some Japanese exporters in fact fear that the current exchange rate may reduce their competitiveness.

Recession Continues
While the Japanese authorities expect a recovery and some positive growth this year, the IMF forecasts a negative growth of 1.4 per cent. In fact, several economic analysts are of the view that recovery is not yet in sight. Consumer prices are still falling at the rate of 0.4 per cent; the economy shrank in the last quarter of 1998; household spending declined by 2.2 per cent in January and 3.8 per cent in February; vehicle sales fell 13 per cent to 4.2 million vehicles in the year to March 31, 1999 - the biggest drop in 12 years; imports contracted by 24, per cent in January over January of 1998; department stores sales in Tokyo fell by 3.4 per cent in February at 8.5 per cent in March. Of the Big Five industrial electronic firms, only Fujitsu made profits in 1998 while Hitachi, Toshiba, NEC and Mitsubishi suffered losses.

Although the government has been spending, business firms and consumers have not. Consumers whose spending makes up three-fifth of the economy are reluctant to spend and this explains the declining sales. Business firms, on the other hand, have stopped all plans for new factories and machinery, as there is overcapacity in most industries. Capacity utilization in 1998 was about 82 per cent in all manufacturing activities - 75 per cent in cars and trucks, 72 per cent in oil products, 70 per cent in machinery, 68 per cent in chemicals and steel. Banks are still weak and the bad-debt plagued Kokumin Bank collapsed after a run on deposits recently. The banks are still strict in lending; tightened credit has forced a number of construction firms into bankruptcy. Joblessness is now at the post-war high of 4.6 per cent and is expected to rise as high as 5.2 per cent because of corporate restructuring. Increasing unemployment tends to reduce consumer demand further.

External pressures are brought on Japan to increase further its public spending in order to revive the economy. Japan, however, has a large public debt and increase in public spending might push interest rates. One way of keeping interest rates low is for the central bank to print more money but the bank is fiercely opposed to it. Japanese recovery is expected to be a slow process, for even in 2000 it will have only a slight growth of 0.3 per cent, according to the IMF.

Japan’s Assistance to Asian Recovery
In spite of the recession it is experiencing, Japan has not been found wanting in its generosity in giving assistance towards Asian recovery. Japan had provided $30 billion in direct aid for the hardest hit of Asia’s economies earlier, and two-thirds of that aid had already been committed. Japan has now extended a further helping hand to Asian countries by offering to guarantee $16 billion in sovereign debt which would be used to keep a fragile regional economic recovery on track. Japan’s new initiative was announced at the recent meeting of APEC finance ministers at Langkawi in Malaysia in May. Legislation has already been passed in Japan to allow the Export-Import Bank of Japan to guarantee sovereign bonds or buy them directly. The scheme is expected to result in an inflow into Asia of a large amount of Japanese money primarily from institutional investors through long-term debt instruments. World Bank President James Wolfensohn said, "Japan has been remarkably vigorous in its support of the region. It is the single most generous country".

Japan-Sri Lanka
The recession in Japan appears to have reduced Japan’s imports from Sri Lanka. Exports of Sri Lanka to Japan reached their peak of Rs. 14,172 million in 1996; they fell thereafter by 2.6 per cent to Rs. 13,815 million in 1997 and by another 8.3 per cent to Rs. 12,669 million in 1998. Exports of garments fell by 6.3 per cent and 11.2 per cent respectively, of rubber by 2.6 per cent and 12.0 per cent respectively. Imports from Japan on the other hand increased by 2.9 per cent in 1997 and by a massive 27.0 per cent in 1998 to reach Rs. 35,903 million. Japan has again become the largest supplier of imports to Sri Lanka. The recession has not adversely affected Japan’s assistance to Sri Lanka. In fact, Sri Lanka’s net receipts of foreign loans from Japan more than doubled from Rs. 3,629 million in 1997 to Rs. 7,780 million in 1998 and net receipts of grants from Japan increased by 35 per cent from Rs. 2,428 million to Rs. 3,280 million. Japan remains the largest aid giver to Sri Lanka and she provided 41.5 per cent of the total foreign assistance in both loans and grants received by Sri Lanka in 1998.

Traffic congestion — does anybody care?
By Analyst

Traffic congestion on the roads in the city is increasing daily. A WHO report is said to have stated that the level of noxious gases in the atmosphere in the city is very high. This is due primarily to emissions from vehicles particularly diesel vehicles.

In UK a similar report by the Royal Commission on Environmental Pollution in the early 1990’s was widely discussed by the public and led to changes in taxation. The British Treasury conducted a fundamental review of vehicle taxation thereafter to raise the cost of owning a vehicle and using a vehicle by private motorists.

Taxes on petrol and diesel were raised and road tolls introduced. But our authorities ignore the problem. Instead of introducing economic disincentives to the ownership and use of vehicles by private motorists, the government dispensed duty free permits for politicians and public servants to increase the already high and soaring vehicle population.

Travel time on the roads has increased. The number of accidents is soaring and with it the number of fatalities on the road. The private insurers refuse to provide motor insurance for vehicles except to a few selected clients. The State Insurance Corporation has to bear the costs of adverse selection in the language of underwriting.

Respiratory diseases in the city and the suburbs have risen dramatically. Will the authorities ever wake up to these adverse effects on the health and safety of the people even if they don’t care about the economic costs of traffic congestion? Meanwhile drivers fume as they crawl round the city at about 10 m.p.h. a pace not much better than that of a bullock cart.

There are two ways to tackle the problem through the supply side or demand side. Hitherto, the government has worked only on the supply side, building better roads, widening roads and constructing new roads. This too is not being done consistently or efficiently. While roads are widened the hawkers are allowed to occupy the pavements and pedestrians have to walk on the middle of the road, rendering the road widening a waste of public funds.

Traffic jams have become not only frequent but has also spread wider and lasts longer as more and more vehicles enter the roads. No longer are the traffic jams confined to the rush hours. They are increasingly frequent off peak and have spread to the suburbs too. The number of new registrations of private cars which was 7,829 in 1993 has increased to 41,151 in 1998 while dual purpose vehicles jumped from 8,973 to 18,455. This is a unique achievement of the present government for prior to it, the number averaged less than 10,000.

Fuel consumption has increased correspondingly. While petrol sales have increased only marginally from 173,000 tons to 203,000 tons, auto diesel sales have more than doubled from 666,000 tons in 1993 to 1,181,000 tons in 1998. There has been an unusually large increase in the number of diesel using vehicles. In no other city in the world do we find such a large number of vans outnumbering the cars as in Colombo.

The reason for this odd situation is the unusual step taken by the government to introduce ad valorem basis of taxation for petrol and anto diesel instead of the previous specific tax of so much per gallon. This has resulted in an economic cross subsidy as distinct from a financial cross subsidy. There is no financial subsidy but two products such as petrol and diesel which cost roughly the same are sold at a huge difference in the selling prices.

Diesel is unusually cheap to the motorist in relation to petrol. But the cost to the economy is the same. So as a result of differential taxation an unusual and unjustifiable economic incentive has been given to the consumption of diesel. Hence there is a large economic incentive for vehicle owners to buy diesel vehicles instead of petrol driven cars. Hence the excessive number of vans plying the roads, carrying one or two passengers for most of the time.

This constitutes a massive waste of investment as well as a waste of fuel per passenger kilometre. Those in authority are not concerned at this colossal wastage. Environmental pollution is also much more in the case of diesel driven vehicles.

It is no wonder that traffic has slowed to walking pace with so many vehicles on the roads. With so many vehicles on the roads, bus travel has become so hard that people have turned to motor bikes. So there are 42,000 new registrations of motor cycles in 1998 and 711,617 motor cycles compete for road space. There are also 75,000 three wheelers whose drivers drive so atrociously that they constitute a serious motoring hazard as well and have added to the daily chaos.

People also travel more because public transport is too cheap and private motoring is unusually cheap for the diesel driven vans.

Railway
The railways continue to be in hibernation. The rail network remained unchanged at 1,463 km. The kilometres operated barely increased from 8,194 in 1993 to only 8,467 in 1998, after five years. The freight carried actually dropped from 159,000 ton kilometres in 1993 to 102,000 in 1998. Why is the railway being neglected?

In most developed cities in the world, increasing private car traffic has not meant any less travel by public transport. In fact transport economists agree that public transport must be promoted and private vehicles for passenger transport should be reduced. But in Sri Lanka where the policy making politicians and bureaucrats use private transport for travel, public transport gets step-motherly treatment. Transport economists have stressed the obvious but their advice has fallen on deaf ears.

Parking
Even small changes can do a lot to reduce congestion. Increased charges for parking have been suggested. Providing more parking space should not be the aim. More parking space attracts more cars. Some cities even insisted that new buildings should have built-in parking. But the exact opposite is that is needed.

Tokyo has all but eliminated parking on street as well as off street. If parking is not allowed, shops abutting roads will lose business and will be compelled to move elsewhere and new ones will not come up. Of course the roads may still be congested with through traffic and three wheelers as we see on Galle Road during the rush hours.

There are other answers to combat the problem of congestion. Some cities have set up "park and ride" schemes with huge car parks on the outskirts of the city and frequent shuttle buses to take drivers into the city centre. Some cities have introduced direct restrictions like limited access for through traffic, less road space for cars, more for cycles or buses.

Buses for example get lanes of their own. Siting of bus stops are also selected with care. We have too many bus stops and they have been inherited rather than planned. Our bus stops are too close and add to overcrowding in junctions.

Some cities have closed areas where private cars are not allowed in. They may be diverted away from crowded junctions. Athens restricts entry into the city on alternate days according to odd or even number plate carrying cars. This will lead to less congestion and less fuel consumption.

Since our public transport system is deplorably inefficient, it is not possible to divert car users to public transport. Car sharing is used in some American cities. Washington and San Francisco experimented with lanes reserved for cars that are fully loaded. Frivolous objections have been brought against such suggestions like "how can we take in strangers in our cars" etc. But this is exactly what happened in San Francisco Bay Bridge rush hour when passengers from bus queues were picked up by motorists to fill up their cars.

One thing that could help to ease congestion is to enable people to work nearer home. This requires a dispersion of offices from the city centre. Jayawardenapura was built for this very purpose. But after the initial moves by the Local Government and Education Ministries the policy has not been pursued.

The Municipal Engineers representative stated at a recent talk that only 6% of the land area of the city is utilised as road space, whereas in London it is 22% and in New York it is 24%. But this is no argument for building more roads. There are other priorities for development.

But it is an argument for restricting the usage of vehicles in the city. What is required is to reverse the forces that draw people into the city. The devolution of power, if effective, should help. One proposal made in Bombay was to stimulate development along suburban rail corridors. The railway can take a part of the present load on the roads.

For decades the railway has been starved of funds for investment. If the government does not have the funds to develop it, it must be privatised. In any case it cannot be run efficiently as a government department.

Pricing Road Space
Among the many remedies, the most obvious is to price the use of road space. Road space is scarce. Why not charge for it instead of allowing it as a free gift to motorists? This principle is already accepted for parking space, although as transport economists point out, the parking fees are too low and should be raised to Rs. 50 to reflect the value of the land used for parking.

New technology is now available to make charging for road space administratively feasible. Singapore introduced it in 1975. Cars entering the city centre during the morning rush hours with fewer than four people aboard, had to display a sticker which then cost 5 Singapore dollars a day. It worked and the number of cars entering the restricted zone fell by three quarters.

Hong Kong experimented with a more precise way of charging road users. Cars were fitted with electronic number plates that identified them to roadside scanners linked to computers at various places in the city. The owners could then be billed for the distance driven.

Economists have for years been telling politicians that the use of road space should not be a free gift to motorists. Its true that motorists pay taxes; taxes on the purchase of a vehicle, on a licence to use it and on fuel. But the first two taxes increase the cost of owning a vehicle, not of driving it. And they are too low compared to the true costs of using road space.

Even petrol taxes make no distinction between where a car is used or when. Some of the costs of driving fall on the owner who pays for fuel. But it is the government that pays for constructing and repairing the roads while other road users pay for the delays caused by congestion society at large pays for air pollution, noise and road accidents.

If drivers had to pay all these costs, as they should, car drivers would be discouraged from making journeys, when the benefits of travelling are less than costs. All this traffic to Colombo city schools would cease if car and van journeys bear the true costs.

One economist has suggested that roads be treated like the telephone or electricity supply — if customers want to use them at peak hours they should pay more. Without pricing road space, road building provides no relief to traffic congestion under-priced trips increase until congestion is as bad as before.

Road space pricing is politically unpopular and has faced much opposition even in developed countries. The sting of the objections can be removed by using the receipts from road pricing to subsidise public transport or for the maintenance of roads. With modern computer technology, business firms could afford to disperse their offices and still communicate speedily with their banks, suppliers and customers.

Hypothecation of taxes
Hypothecation of taxes for a particular service is now in vogue. We still follow the practice of pooling all revenue into a consolidated fund. There is no clear link between taxes and services. Economists like Milton Friedmann and Samuel Britain have argued that the state was soaking up too much private wealth and crowding out private investment and in the long run undermining its own sources of income.

High taxes also threatened economic growth. So the priority was to reduce taxes and encourage people to take greater financial responsibility for their own education, health, housing and transport. It is necessary to re-connect taxation to the service provided from taxation. Hypothecation of road taxes involves earmarking all revenue from vehicle ownership, fuel etc. for road construction and road maintenance instead of letting such revenue flow into the consolidated fund.

This will make the government more accountable to the constituency of motorists who pay these taxes. People like to see that the revenue raised by taxation is well spent by the government. In a developing country it is always necessary to ensure that people understand why it is necessary to tax.

Improve Railways
For years the railway was allowed to deteriorate. At last the government has got round to acknowledging the need to develop the railway. Hitherto equipment if replaced was only when it had totally broken down. Maintenance of the track has been neglected.

There is no discipline among the staff as elsewhere in government. There is little or no management. Frequent train break-downs infuriate the commuters. But to relieve congestion on the roads, the railway must carry a higher proportion of both passenger and freight traffic than they do today.

Freight must be lured off from lorries to railway wagons. This requires improvement inefficiency of handling freight. It is the failure of the railway to keep pace with the demands for transport that has, at least partly caused the present bedlam.

Recently the government allowed Puttalam Cement Co. to use its tracks and run its own wagons. This is a step in the right direction and the private sector should be allowed to run a freight transport service at least if not a private passenger service.

As in Britain the rail track can continue with the government. Meanwhile rail fares must be raised. When were the rail fares last raised? In real terms the train fares must be zero in relation to its last revision. Inflation has continued each year at not less than 10% per annum.

The regulation of train fares should be given up and franchises awarded to any private investor who want to operate trains. There are such private train operators in the UK. If there are private investors willing to enter the field, the government could obtain much needed income by setting them franchise to run trains.

If fares have to be subsidised, the government could channel them through the private operators as in UK. It was said during the privatisation of British Rail, that if "anyone has got half decent management, is bound to improve on British Rail’s performance." In the case of our own CGR any private management is bound to improve performance. But will the government take any action?

For the trading week ended Friday 25 of June 1999
The Forbes ABN AMRO Business

Foreign investors set the trend
GDP growth slashed further to 2.9% for 99
Expect momentum to pick up in 2H99
No change in interest rates

Foreign investors’ set the trend —
Market activity registered a significant improvement as average daily turnover moved up 68% to 65.1m level. Bulk of the trading was triggered by foreign to foreign transactions centring LLUB, JHK, Ceylon Oxygen, NDB & DFCC whilst local investors remained mainly dormant. Further overall overseas activities contributed towards 75% of average daily turnover resulting a total outflow of Rs. 46.2m. Prices recovered to some extent towards the end of the week as the ASPI closed at 515.2, registering a gain of 1.4 for the week.

Despite the one off foreign transactions that boosted activity during the week, we do not expect the market to recover in the near term, as local investors remain, passive amidst lack of market moving news.

GDP growth slashed further to 2.9% for 99:
We are downgrading our estimates of GDP from 3.6% to 2.9% mainly due to the depressing external environment where exports and imports have recorded significant declines YOY of 12.7% (Exports) and 16.9% (Imports) for the first four months of the year. This is the second significant downgrade in the last two weeks with GDP being downgraded previously from 4.5% to 3. 6%. The previous downgrade too was due to slowing external trade and a resultant lower growth in factory manufacture.

Expect momentum to pick up in 2H99.
We expect economic activity to gain momentum as the year draws to a close. This is featured into our forecast of a full years growth of 2.9% which would need the next three quarters growing at an average pace of around 3%. Our premise that growth will pick up is based upon the following:

1) Relatively higher tea prices 2) A weaker rupee vis a vis competitors 3) Reduced political uncertainty with no elections in the 2H99 4) Privatisation’s 5) Key projects being initiated i.e. Colombo port. 6) Better output from agriculture especially paddy and subsidiary crops. The fourth and fifth points will no doubt also improve sentiments, which is imperative to regain lost momentum. Moreover inflation at relatively low levels will improve further the competitiveness of local exports.

No change in interest rates. The 3, 6 & 12 months T-bill interest rates remained at 11.81%, 12.04 & 12.65%.

Lanka Tiles board reconstituted

The board of directors of Lanka Tiles Ltd., where there has been a change in the ownership structure, has been reconstituted company sources said, with some new board appointments made to reflect the ownership changes.

Representatives of the Ceylon Theatres Group which is now a major shareholder of the company with a 19% stake in it have been appointed to the board. Mr. Nahil Wijesuriya, who recently acquired a 8% slice of the company sold by Vanik Incorporation, has also taken a seat on the board.

The Ceylon Theatres representatives are Messrs. Anthony Page, managing director of Ceylon Theatres and Errol Pereira, managing director of Millers, a member of the Ceylon Theatres Group. Mrs. Cecilia Muttukumaru and Rajiv Casie Chitty of CT Smith Stockbrokers, representing a foreign fund manager with a substantial stake in Lanka Tiles, have also been appointed to the board. CT Smith also belongs to the Ceylon Theatres Group.

Mr. Bhadra Wimalasekera, the head of Uni Walker, which held a major slice of Lanka Tiles and managed the company, remains on the board. But two Uni Walker representatives have resigned from it.

The Colombo Stock Exchange said that they have been informed that Messrs. Page, Pereira, Wijesuriya, Casie Chitty, L. J. A. Pieris (alternate M. J. Wimalananda) have been appointed directors of Lanka Tiles with effect from June 18.

Messrs. S. Sivasubramaniam, S. R. Kuruppu and P. Nimalan have resigned from the board of the company.

Capacity constraint leashes Royal Ceramics

Royal Ceramics Limited (RCL) which is one of the few companies manufacturing a tile that can be relaid on an existing floor has been expanding sales in the domestic market according to a corporate update by John Keells Stock Brokers (Pvt) Limited.

But the brokers had revised downwards their previous earnings estimates for the company to a profit of Rs. 102 million, down from their previously forecast Rs.108 million for the current financial year. This is due to RCL reaching full production capacity levels in the year ending March 31, 1999 with scope for further growth this year being limited.

John Keells said that RCL will press on with a Rs.250 million investment drive in two stages. The first is directed at improving quality, variety and flexibility of the existing operation and is expected to cost approximately Rs.120 million. It is likely to be funded mainly through internal funds.

The brokers said that although they have downwardly revised their estimates for the company’s earnings during the current and next financial years, RCL has the capacity to recoup earnings in the long term once capacity additions are executed.

"Given the high cash generating capacity of the business, it is likely that the current dividend policy will be maintained at 20%,’’ the report said. RCL is still within its tax holiday and dividends are tax free.

John Keells which rated RCL as "an ideal defensive play’, maintained its `buy’ recommendation on the RCL share.

Bartleet’s weekly market commentary

The market fluctuated within a narrow margin closing the week on a positive note. The downward momentum witnessed through seven consecutive days was erased on Thursday, which saw both indices gaining marginally. Both indices appreciated marginally on Friday as well. However, the ASI recorded a decline of 1.1 points WoW before closing at 515.2 while the blue chip index, MPI, remained flat at 821.3. Turnover recorded was an encouraging Rs.32 lMn, up 67% WoW. The average daily turnover for the week was Rs. 65Mn compared to Rs.38. 4Mn recorded during the previous week. Foreign purchases and sales accounted for 69% and 83% of the week’s turnover thus recording a net outflow of Rs. 46.2Mn. Market capitalisation, which opened at Rs.102.67Bn declined marginally to close at Rs.102.46Bn.

Large parcels of NDB 1,171200 @ Rs...84/-, JKH 114,600, 100,000, 65,500 & 60,100 @ Rs.158/-, Coca Cola 157,500 @ Rs.38/-, Ceylon Oxygen 279,000 @ Rs.30/-, Lubricants 350,000 @ Rs.58/-, Cold Stores 60,100 @ Rs.72/- and Aitken Spence 500,000 @ Rs.95/- changed hands, mainly among foreign investors, during the week.

Even though the foreign participation improved dramatically the domestic investor enthusiasm remained sluggish throughout the week. However, we anticipate domestic funds to activate during the next couple of weeks considering the positive direction shown by the foreign investors. We reiterate our recommendation on fundamentally sound stocks and advise investors to accumulate stocks such as Lanka Lubricants, Tokyo Cement, Cold Stores, Aitken Spence, Dockyard, Sampath, NDB, DFCC, Richard Pieris, JKH, Hayleys and Trans Asia and Ceylon Tobacco which are trading at attractive valuations.

Plantation stocks edged up marginally on Thursday and Friday with investors speculating on a gradual revival in tea prices during the latter part of 1999. It is expected that tea prices could move on the upside if the prevailing shortfall of production in Kenya and India aggravate further.

In the international front Tokyo’s benchmark Nikkei 225 average drifted lower. The Nikkei average fell 64.88 points or 0.37% to 17,563.44. Hong Kong stocks were lower in early Friday trade after Wall Street tumbled overnight on fears of a US interest hike. The Hang Seng Index fell 60 points or 0.44% to 13,719 after erasing a 61-point gain earlier.

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